I affectionately refer to Charlie Munger as Warren Buffett’s sidekick at Berkshire Hathaway. Buffett and Munger have been friends for decades and business partners as well. Charlie Munger serves as the Vice Chairman of Berkshire Hathaway and is 89 years old. He reminds me a bit of Andy Rooney. Some might classify him as eccentric and a bit of a curmudgeon. However, I heard once that Howard Buffett, Warren’s son, tells people that Charlie is the only person he knows that is smarter than his father. When I read that, it really caught my attention and piqued my interest. Smarter than the great Oracle of Omaha? Wow!
Mr. Munger is a fascinating man. You might think of him as a modern day Benjamin Franklin. The man is well-versed in most every subject imaginable. The most interesting thing about him is his “latticework of mental models”. You see Charlie views the world of investments and financial markets differently than most. In fact, he sees the entire world quite uniquely. The “latticework of mental models” is essentially using the “big” ideas and concepts from other disciplines to improve your understanding of market participants and investing in general. For example, Charlie talks a lot about the behavior of investors from a biological standpoint. One of the big concepts in biology has to do with complex adaptive systems in ecosystems. If you think about the rain forests of Brazil, there is so much diversity in life forms and interactions there. Many new species are discovered there every year. However, pollution and burning of the rain forest has caused the ecosystem to change in unexpected ways. Now Munger believes that financial markets operate in the same way. Each investor or institution is constantly trying out new investment strategies and trying to anticipate what other market participants will do and how the global economy will grow in the future. There is essentially an ever-changing disequilibrium within the financial markets which is always searching for an equilibrium. My actions in the financial markets will affect how others will react now and act in the future. It is very much akin to game theory developed by the Nobel Prize Winning economist, John Nash. This example demonstrates just one of Charlie’s insights.
I strongly suggest that you get to know Charlie Munger better. Once you listen to him, you can’t help wanting to learn more about him and the latticework. If you would like to learn more about this man, I would point you in the direction of this book: http://www.amazon.com/Damn-Right-Berkshire-Hathaway-Billionaire/dp/0471446912/ref=sr_1_1?ie=UTF8&qid=1376246794&sr=8-1&keywords=Damn+Right. The book, Damn Right, is a fabulous discussion of the man that sits beside Warren Buffett. In fact, Charlie is a lawyer, but his investment partnership had incredible returns as well. If you want to learn more about his “latticework of mental models”, here is a link that describes it briefly: http://www.psyfitec.com/2011/09/mental-models-arrayed-on-charlie.html. Now let’s move to the man that has codified Charlie Munger’s ideas into a book which focuses on investments.
There is a book out there by Robert Hagstrom. Here is the link: http://www.amazon.com/Latticework-Investing-Robert-G-Hagstrom/dp/1587990008/ref=sr_1_sc_1?ie=UTF8&qid=1376247028&sr=8-1-spell&keywords=latticwork+the+new+investing. The book is called Latticework: The New Investing. You may know Robert Hagstrom from Legg Mason fame with Bill Miller who beat the S&P 500 for over a decade straight. Mr. Hagstrom also has written extensively on Warren Buffett. In fact, I consider them the best practical books on investing like Warren Buffett. The books are The Warren Buffet Way, The Warren Buffett Portfolio, and The Essential Buffett. Since he covered Warren Buffett, he couldn’t help but notice Charlie Munger. Thus, he decided to write a book about him.
I will now try to bring this concept back down to earth and not so abstract. Have you ever met a “random” person and found out that you know the same person or grew up a few blocks away from each other? Even though you do not know the person, you have something in common. It makes the discussion easier. I will give you an example from my personal life. My best friend is an African American. We couldn’t come from more different backgrounds, level of education, family structure, and life experience. I met this gentleman at work in the financial services industry. Now we talked about finance of course, but, I cannot actually recall how it happened back then and we first really connected. Well, my friend happened to be a DJ who knows everything there is to know about hip hop music, and he is a very talented musician as well. I listened to a lot of hip hop growing up and playing basketball at the inner city parks in Milwaukee. We started to talk about music. There was an instant connection there, and I felt like I knew him forever. The odd thing is that he happens to be the smartest person I know. Why? He does not have a college degree, but he views the world very interestingly. You can have a conversation with him about Federal Reserve policy, deontological concepts from Immanuel Kant, black holes, conspiracy theories, and if Queensbridge has the best rappers from the origins of hip hop. Very diverse knowledge base to say the least. I count myself extremely fortunate to have this friend. He sees the world differently than most. He sees connections where others see silos of academic subject matters. Now if you saw us on the street, you would probably never guess that we were such good friends. Well, Charlie Munger sees the world in such a way as well.
Hagstrom’s book goes into depth about the subjects that Munger reads and learns about. He talks about physics, biology, psychology, history, literature, and other matters. It is interesting how many of the concepts and theories of these disparate topics can be used to look at financial markets and economic activity in the world. For example, you might be most familiar with the fields of behavioral finance and behavioral economics. All these fields are “simply” applying psychological concepts to the real world of investing. Are people really rationale? Do we have cognitive biases that blind us in making everyday decisions? Now psychology is easier to relate to investing. However, the equilibrium and disequilibrium theories of physics can be applied as well. I will not go into any further depth. As you can tell from my blog in general and this post, brevity and being succinct are not really my strong suits. With that being said, I would point you to a website that will “blow your mind” and really make the “latticework of mental models” come alive: http://www.santafe.edu/. The Santa Fe Institute has a group of academicians and others who look for connections between different subjects. Now I will warn you that a lot of the material is quite complex and it is not specifically about investing. However, you will learn quite a bit from looking at a few of the papers published.
Well, how do you go about building your “latticework of mental models”? Have you ever wanted to learn more about astrophysics, history, or science? There is one free way to do it. The Massachusetts Institute of Technology (MIT) has a website that provides actual information taught in the classroom and a lot of video lectures. When you hear MIT, you might automatically associate it with technology, engineering, and computer science. However, it is a great higher learning institute and has renowned professors in business, math, history, and literature. Here is the link: http://ocw.mit.edu/index.htm. The OpenCourseWare system is incredibly unique and valuable. Try it out with a topic you have heard of, but you do not know about in any detail. There are video lectures that are 20-30 minutes long. Additionally, you will have access to lecture notes and the books/articles read. So you can go to your local library and research more. You can link to one of the best schools in the world and learn from them. It is an exceptional opportunity.
I hope this explains the Latticework in my company’s name and why I use the concept in my investing and personal life as well. Once you learn about the “latticework of mental models”, it will definitely challenge how you view the financial markets. If nothing else, it might satisfy your intellectual curiosity.